As Wall Street rebounds on the strength of over $13 trillion in taxpayer subsidies, its denizens want to rewrite history. This isn't a conspiracy. Rather this is what human nature does to make sense of a complex world, especially when you work in an industry that is accustomed to reigning supreme. You have to feel like you really are worth the big bucks. You have to feel that you've been doing a good job, and that you've done nothing to crash the economic system. Yet still you crave an explanation for what went wrong. You can't blame free-market ideology because that's who you are. That's leaves government bashing - Wall Street's version of populism.
Wall Street is not happy at all with our real financial history, which they'd prefer that we forget. That history locates the cause within our giant free-market experiment that went terribly wrong, starting in the late 1970s. That experiment had two fundamental components: 1) unleash the free-market, especially the financial sector, from its New Deal constraints, so that it can "innovate," and 2) change the tax code so that wealth could accumulate at the top in order to spur entrepreneurial incentive. The economy was supposed to boom and all boats were supposed to rise.
Instead we created the most unequal distribution of income since the great crash of 1929. And, just as in 1929, we had another great crash. The super-rich accumulated so much wealth that they literally they ran out of real world economic investments in assets related to tangible goods and services producing industries. Wall Street rode to the rescue by creating new financial instruments that formed a vast fantasy finance casino built upon risky assets, sold again and again through derivative products that supposedly had the risk engineered out of them. These puffed up securities were wildly profitable for Wall Street, more profitable than anything they had ever previously created or sold. When the underlying assets turned out to be junk assets instead of AAA bonds, trillions of dollars worth of securities turned toxic. (Forgive the advertisement, but The Looting of America is good place to get this story straight.).
Lo and behold, all boats did not rise. Instead, the average real wage decline by 18 percent over the past three decades. Debt accumulated, and we careened from financial bubble to financial bubble - savings and loan, dot.com, and then housing. Financial innovation, instead of dispersing risk, connected it up, leading us to the greatest crash since the Great Depression, with more than 29 million now unemployed or underemployed.
To prevent a total collapse the government poured trillions into Wall Street. We saved their butts and ours as well. Now that we're moving back from the precipice, the financial barons are making record profits and are eager to dole out their large bonuses again. They are using their welfare checks to lobby Congress to make sure they can.
They also want to rewrite history and the new theme--of course!--is that the government is to blame...yet again. You see, it all started when the government provided tax subsidies to housing, which in turn led to the post-War boom of middle class housing, which in turn led to more and more demand for housing. Everyone wanted to be a homeowner even when they couldn't really afford it. The government enabled the process through allowing deductions for mortgage interest payments. This was an economic distortion that inevitably led to the housing bubble and then the bust. Furthermore the government passed the Community Readjustment Act which pushed marginal, low-income buyers into the system, creating even more risk.
In addition, the new history says, the government failed to bust the asset bubbles. Instead, Greenspan inflated them, especially after the dot.com bust and 9/11. The Fed let the money supply grow too rapidly by not regulating the shadow banking system. There was too much money in the system making the bubble and bust inevitable.
This historical rewrite is incredibly important to Wall Street and to all of us. It is the ultimate justification for continued sky high salaries. It says, "See we were and still are America's strongest industry. We deserve to be paid tens of millions because our innovations in fact are the best products this country has to sell." Of course, the new history also creates the backdrop for resisting any and all reforms to the financial system, especially a crackdown on compensation and profits.
Most importantly, it totally ignores the driving force of the entire mess -- the overall lax tax code that has enabled our obscene distribution of wealth that has funded the fantasy finance casino. Far better to construct a fantasy history that blames the government that is bailing you out.
These guys (and some gals) are not stupid. They have a sixth sense about where the country is heading. They know that Americans are really ticked off at Wall Street and at the government for bailing them out and getting nothing much in return. To the average American, it looks as if the government is afraid to take on Wall Street and the wealthy. And for very good reason--the government has been pathetically afraid to take on Wall Street! It's only natural that they tap into the part of the zeitgeist that blames the government. By reinforcing it, they might deflect some of the heat away from their welfare payments and their outsized pay packages. Ordinary folks can't vote Wall Street out of office, but they can get at politicians.
When you step back and look at it all, it's utterly amazing. Wall Street creates the casino, makes hundreds of billions in phony profits, and then crashes the economy. We then turn over the treasury to them in order to prevent the Great Depression II. It seems to work as the Dow moves near 10,000.. Then a revitalized Wall Street turns around and blames the government for the entire mess while trying to pirouette itself onto the side of anti-government anger. Now that's what I call financial innovation.
Be nice if we had a Left to counter it.
Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It, Chelsea Green Publishing, June 2009.